Holding

The Supreme Court held that CEGAT's approach was legally untenable and that the appropriate price must be ascertained based on the nearest ascertainable equivalent, remitting the case to CESTAT for fresh consideration.

Summary

The assessee, Mis. Somaiya Organics (India) Ltd., operated a distillery that produced ethyl alcohol denatured (SDS) and a chemical factory that consumed the SDS for manufacturing specified chemicals. The assessee valued the transferred SDS on a costing basis under Rule 6(b)(ii) of the Central Excise Valuation Rules, 1975, and claimed MODVAT credit. The Revenue argued that the assessable value should be fixed under Rule 6(b)(i) using the highest price at which other manufacturers sold SDS on particular dates, leading to a differential duty demand. The Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) set aside the assessing authority’s price, deeming the highest‑price method unsustainable, and allowed the assessee. The Supreme Court held that CEGAT erred by discarding the assessing authority’s price without determining the appropriate ‘nearest ascertainable equivalent’ and remitted the matter to CESTAT for fresh consideration, partially allowing the appeal.

Issues considered

Whether the assessable value of SDS transferred between the assessee’s units should be fixed under Rule 6(b)(i) using the highest price of other manufacturers or under Rule 6(b)(ii) on a costing basis.
Whether the CEGAT correctly set aside the assessing authority’s valuation without ascertaining an appropriate price under Section 4(1)(b) of the Central Excise Act.
What constitutes a ‘nearest ascertainable equivalent’ for valuation purposes under the Central Excise Valuation Rules.

Legislation cited

Central Excise Act, 1944s. 111A, s. 4(1)(a), s. 4(1)(b)
Central Excise Rules, 1944s. Rule 173C
Central Excise (Valuation) Rules, 1975s. Rule 6(b)(i), s. Rule 6(b)(ii)

Subjects

central excisevaluationassessable valueRule 6(b)nearest ascertainable equivalentdifferential dutyMODVATCEGATCESTATSDSdenatured alcohol

Judgment

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A COMMNR. OF CENTRAL EXCISE, ALLAHABAD
v.
MIS. SOMAIYA ORGANICS (INDIA) LTD.

NOVEMBER 12, 2007
B [DR. ARIJIT PASAYAT AND D.K.•JAIN,JJ.] t

""
Central Excise Act, 1944-s. 4 (1) (b)-EthylAlcohol Denatured
(SDS)-Used for manufacture of specified products by the other
c manufacturing unit ofthe assessee-Excise duty on-Payment ofon
costing basis in terms ofr. 6 (b)(i) of Valuation Rules, by the assessee-
Revenue demanding on the basis of 6 (b)(i) at the highest price at
which SDS was sold by other manufacturers on a particular date-
CEGAT_setting aside the levy holding that adoption ofhighest price
D not correct-On appeal, held: CEGATwas required to determine the
appropriate price-Since it was not determined, matter remittedfor
fresh consideration-Central Excise Valuation Rules, 1975-r. 6 (b)
"'
(i) and (ii).

Respondent-assessee was having two manufacturing units.
E One was distillery where they used to manufacture Ethyl Alcohol-
Denatured (SDS). The stock of SDS was transferred to their other
unit i.e. a chemical factory for manufacture of specified chemicals.
They were paying excise duty at the time of transferring the stock
ofSDS to their other unit and MODVAT credit of the duty paid
F was availed in the other unit (chemical factory). The value had been
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..
arrived at by the assessee for the purpose of Section 4 (1) (b) of
Central Excise Act, 1944, on costing basis in terms of Rule 6 (b)
(ii) of Central Excise Valuation Rules, ·1975 during the relevant
period. Show Cause Notice was issued to the assessee, alleging
G that assessable value was to be fixed in terms of Rule 6 (b) (i) and
not under 6 (b) (ii) and it was proposed to fix the assessable value
)...
on the basis of the highest price at which SDS was sold by other
manufacturers on particular dates. Differential duty was
demanded. Commissioner of Central Excise confirmed the demand.
H 1068
,, COMMNR. OF CENTRAL EXCISE, ALLAHABAD v. MIS. 1069
SOMAIYA ORGANICS (INDIA) LTD .
..>

Appeal of the assessee was allowed by Customs, Excise and Gold A
(Control) Appellate tribunal (CEGAT) holding that the Department
adopting the highest price was unsustainable in law. Hence the
present appeal.
Partly allowing the appeal and remitting the matter, the Court
B
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HELD: CEGAT appears to have taken the stand that one day
high price cannot be applied even though Rule 6(b) (i) may apply.
CEGAT bad come to the conclusion that no principle has been
formulated and expressly no reason has been given. The stress is
on nearly ascertainable equivalent as the expression 'ascertainable' .c
means ascertained. There may be different rates for .different
periods. There may be cases where even for the periods the highest
and the average prices may be taken. CEGAT has not determined
what would be the appropriate price. By merely discarding the price
fixed by the assessing authority the issue does not get solved. What D
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was required to be seen is as to whether there was any ascertainable
price and on what basis it can be ascertained. Even for a period, th~
highest or the average can be taken. That has to be done on the basis
of the judicial discretion of the assessing officer which can also be
decided by the appellate authority by finding out whether there is E
any rationale in the fixation done. In that view of the matter, the
approach of the CEGAT is not legally tenable.
[Paras 9 and 10] [1073-F, G; 1074-A, C, D, E]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4975 of
).. 2002. F

From the final Order No. 71/2002-A dated 20.2.2002 of The
Customs, Excise & Gold (Control) Appellate Tribunal, New Delhi in
Appeal No. E/467/2001-A.
Nagender Rai, Aruna Gupta and B.K. Prasad for the Appellant. G
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V. Lakshmi Kumaran, AR. Madhav Rao, Tarun Jain, Monish Panda
and Rajesh Kumar for the Respondent.
The Judgment of the Court was delivered by
H
1070 SUPREME COURT REPORTS [2007] 11 S.C.R.

A DR. ARIJIT PASAYAT, J. 1. Challenge in this appeal is to the
judgment of the Customs, Excise, and Gold (Control) Appellate Tribunal,
New Delhi (in short the 'CEGAT') allowing the appeal filed by the
respondents (hereinafter referred to as the 'assessee'). Before the CEGAT
challenge was to the order passed by the Commissioner of Central Excise,
B Allahabad.

2. Factual background in a nutshell is as follows:
The respondents are having two manufacturing units- a distillery at
Captainganj and a chemical factory at Barabanki. In their distillery the
C respondents manufacture Ethyl Alcohol-Denatured (for short 'SDS'). The
stock of SDS is transferred to their Barabanki unit where it is wholly
consumed in the manufacture of specified chemicals. Under the order of
the adjudicating authority the differential duty demand of
Rs.14,89,61,104.00 was confirmed on the entire quantity of SDS
D transferred from Captainganj unit to Barabanki unit during the period from
April 1994 to December 1999. Aggrieved by the above, the assessee
filed the appeal before CEGAT.
Show cause notices were issued for different periods as follows:
E .S.No. Show cause notice No. Dt. Period Differential du!)'.
1. C.No.VI(MP) Demand(l2) ADJ April, 94 Rs.14,59,49, 158.65
-1 i6/98/3149 dt.26.3.99 to Feb., 99
-SCN No.12/Commnr.-AUD-
99/26.3.99
F -1
2. C.No.20 CE/Somaiya/SBZ/99 March, 99 to Rs.25,12,528/-
1550 dt. 31.8.99 July, 99
3. C.No.20-CE/Somaiya/SBZ/61 August, 99 to Rs.4,99,417/-
dt. 18.1.2000 Dec, 99
G
3. Excise duty was levied on SDS for industrial consumption w.e.f. ~
1.3 .94. The respondents were paying excise duty at the time of transferring
the stock of SDS to their Barabanki unit and modvat credit of the duty
paid was availed in the Barabanki unit. The assessable value had been
H
COMMNR.OFCENTRALEXCISE,ALLAHABADv. MIS. 1071
SOMAIYAORGANICS(INDIA)LTD. [PASAYAT,J.]
arrived at by the respondents on costing basis in terms of Rule 6(b)(ii) of A
the Central Excise Valuation Rules, 1975 (in short 'Valuation Rules') during
the relevant period. In the show cause notice, it was alleged that the
assessable value has to be fixed in tenns of Rule 6(b)(i) and not under
Rule 6(b)(ii). It was then proposed to fix the assessable value on the basis
of the price at which SDS was sold by the following manufacturers for B
different years:-
Period Other manufacturers Applicable date Value
Messrs per ltr./Bl.
1994-95 Saraya Distillery 13.6.1994 Rs.20.00 c
Gorakhpur
1995-96 -do- 20.6.1995 Rs.12.90
1996-97 -do- 10.3.1997 Rs.14.00
i997-98 -do- 20.11.1997 Rs.14.75 D
4/98 to
2/99 Kisan Sahkari Chini
Mills, Ghosi 1.12.1998 Rs.15.50
3199 to E
7/99 -do- 20.3.1999 Rs.14.25
8/99 to
12/99 -do- 10199 Rs.14.25
4. Thereafter, by a corrigendum dated 14 .1.2000 sale price fixed
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at Rs.14.25 was corrected as Rs.15/-. On this basis, the differential duty
demand, as mentioned, was made. The respondents contended before
the adjudicating authority that the entire quantity of SDS manufactured at
its distillery is being consumed at Barabanki unit for manufacture of
specified articles. Molasses which is the major raw material for
manufacture of SDS was obtained by the respondents at controlled rate
G
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in tenns of the provision ofU.P. Molasses Control Order, 1964 but other
distilleries manufacturing Ethyl Alcohol for non-specified purposes had to
purchase molasses at market detem1ined prices. Therefore, there could
be no comparison between the cost of production of SDS by the
H
1072 SUPREME COURT REPORTS [2007] 11 S.C.R.

A respondents and Mis. Saraiya Distillery, one of the manufacturers whose
selling price had been relied upon in the show cause notice. Respondents
determined the assessable value of SOS for the purpose of Section 4(1 )(b)
of the Central Excise Act, 1944 (in short the 'Act') on costing basis as it
had no sale of SOS. The cost fixation was undertaken annually on the
B basis of the previous year's Balance Sheet for determining the value and
discharge duty since the Balance Sheets are finalised only in the month of
September for the year ending on 31st March. On receipt of the finalised
Balance Sheet in September, the value determined on the basis of the
earlier Balance Sheet was being revised. If the revision was upward,
c differential duty was discharged on the increased value. The price
declarations filed effective from 1.3.1994 along with the questionnaire was
approved by the Central Excise authorities. With effect from 1.4.1994,
when Rule 173C of the Central Excise Rules, 1944 (in short the 'Rules')
was amended the respondents filed the declarations under Rule 173C also.
D 5. The actual value on which the respondents cleared SOS during
the period in question is as under:
1994-95 Rs.5.85 per ltr.
1995-96 Rs.5.50 per ltr.
E
1996-97 Rs.5.50 per ltr.
4/97 to 11/97 Rs.8.30 per ltr.
12/97 to 11/97 Rs.12.41 per ltr.
F 4/98 to 3199 Rs.13.52 per ltr. -'\'
4199 to 7/99 Rs.17.43 per ltr.
8/99 to 12/99 Rs.17.43 per ltr.
G 6. The respondents further contended that proposal in the show
cause notice to fix the assessable value on the basis of the highest price
at which one of the manufacturers sold SOS on particular date is totally
illegal. It was further contended that for the period from April 1999 to
December 1999 the respondents had paid on a higher assessable value
H than what was proposed in the show cause notice. l11erefore, there is no
COMMNR. OF CENTRAL EXCISE, ALLAHABAD v. MIS. 1073

-• SOMAIYA ORGANICS (INDIA) LTD. [PASAYAT, J.]
basis for demanding differential duty during this period. The adjudicating A
authority did not accept the contentions raised by the respondents. The
Commissioner of Central Excise, therefore, confirmed the differential duty
demand of Rs. 14,89,61,104/- and imposed penalty amount equal to' the
duty demand by invoking Section 1lAC
7. Considering the rival submissions CEGAT held as follows: B

"There is no reason given by the Revenue as to on what basis
the highest price of particular day in each year was taken into
consideration for the purpose of fixing the assessable value in the
case of the SDS cleared by the appellant. Choice of the highest c
price on a particular day will not satisfy the requirement of nearest
ascertainable equivalent. Section 4(1 )(b) provides that "where the
normal price of such goods is not ascertainable for the reason, that
such goods are not sold or for any other reason, the nearest
ascertainable equivalent thereof determined in such manner as may D
be prescribed". Therefore, even when clause (i) of sub-rule (b) of
Rule 6 is applied, the endeavour must be to determine nearest
ascertainable equivalent. We have no hesitation to hold that such
an exercise has not been done in the present case. The department
adopting the highest price is unsustainable in law".
E
8. It is to be noted that while revenue relies on Rule 6(b)(i) of
Valuation Rules the assessee relies on Rule 6(b)(ii). Section 4(1 )(a) of
the Act is applicable when the buyer is not a related person. Section
4( 1)(b)) relates to a case where the price is not ascertainable.
F
>-- 9. Stand of the appellant is that comparable price is available because
there were two units at Captainganj and Barabanki. The assessee tried
to make a distinction by submitting that the product was captively
consumed. CEGA T appears to have taken the stand that one day high
price cannot be applied even though Rule 6(b)(i) may apply. There is no
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dispute relating to the period from April 1999 to December 1999. For
""""' the period from April 1994 to February, 1999 the same was covered by
a show cause notice dated 26.3.1999 and for the period March 1999 it
is covered by a show cause notice dated 31.8.1999. CEGAT had come
to the conclusion that no principle has been fommlated and expressly no
H
1074 SUPREME COURT REPORTS [2007] 11 S.C.R.

A reason has been given. The stress is on nearly ascertainable equivalent as
the expression 'ascertainable' means ascertained. There may be different
rates for different periods. There may be cases where even for the periods
the highest and the average prices may be taken. The proviso to Rule 6
(b) (i) is relevant:
B "on the value of the comparable goods produced or
manufactured by the assessee or by any other assessee:
Provided that in determining the value under this sub-clause,
the proper officer shall make such adjustments as appear to him
c reasonable, taking into consideration all relevant factors and, in
particular, the difference, if any, in the material characteristics of
the goods to be assessed and of the comparable goods"
10. It appears that the CEGAT has not determined what would be
the appropriate price. By merely discarding the price fixed by the assessing
D authority the issue does not get solved. What was required to be seen is --4,
as to whether there was any ascertainable price and on what basis it can
be ascertained. Even for a period the highest or the average can be taken.
That has to be done on the basis of the judicial discretion of the assessing
officer which can also be decided by the appellate authority by finding
E out whether there is any rationale in the fixation done. In that view of the
matter, the approach of the CEGAT is not legally tenable. We set aside
the order ofCEGAT and remit to CESTAT, which has come in place of
CEGAT, for fresh consideration.

F 11. The appeal is allowed to the aforesaid extent. There will be no
order as to costs.
K.K.T. Appeal Partly allowed.

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